Arkema Downgraded by Morgan Stanley on Fading Acrylic Acid Margins

Morgan Stanley downgraded French specialty chemicals firm Arkema S.A. (EPA:AKE) to "equal-weight" from "overweight" on Monday, citing moderating acrylic acid spreads and a valuation that now appears fair relative to its history.

Earnings Estimates Slashed

In its report, the bank announced a material reset in its financial outlook for Arkema. The price target for the company's stock was cut by 24% to €63 from a previous €83.

This move was accompanied by significant reductions to future earnings forecasts. Morgan Stanley lowered its adjusted earnings per share (EPS) estimates for the fiscal years 2026, 2027, and 2028 by 26%, 35%, and 56%, respectively. The bank attributed these revisions to several factors:

• Normalization in the Primary Materials cycle, expected from the fourth quarter of 2026.
• Slightly lower volumes in the Adhesive Solutions segment.
• Higher net financial charges and a slightly increased tax rate.

Weakening Spreads and Soft Demand

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The primary driver for the downgrade is the outlook for acrylic acid, a key product for Arkema. Spreads, or the margin between the selling price of acrylic acid and the cost of its feedstock propylene, are expected to decline. While spreads recently held up as falling propylene costs outpaced the drop in acrylic acid prices, this trend is not expected to last, according to the analysts.

Downstream demand for Arkema's products remains largely soft, particularly in markets tied to building and construction. These segments, which account for roughly 47% of the Adhesive and Coating Solutions divisions, face a weak backdrop. Morgan Stanley referenced a EuroConstruct forecast for EU refurbishment spending to grow just 1% in 2026.

Valuation and Segment Outlook

While Arkema's High Performance Polymers division is a bright spot, with a forecasted 5% compound annual growth rate driven by demand for PVDF products in electric vehicles and energy storage, this strength is muted by weakness in other areas.

Arkema currently trades at 6 times its forecasted 2026 EBITDA, which is in line with its five-year historical average. Morgan Stanley noted that while the company offers a respectable 7% average free cash flow yield for 2026-28, other peers in the sector, such as Evonik, present more attractive cash generation profiles.